<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1998
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-16580
TELENETICS CORPORATION
(Name of small business issuer in its charter)
California 33-0061894
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26772 Vista Terrace Drive
Lake Forest, California 92630
(Address of principal executive offices)
Issuer's telephone number: (949) 455-4000
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [_] No [X]
The number of shares outstanding of the registrant's only class of Common
Stock, no par value per share, was 44,180,826 on November 13, 1998.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
TELENETICS CORPORATION
a California corporation
Consolidated Balance Sheets
(Unaudited)
___________
September 30, 1998
<TABLE>
<S> <C>
ASSETS
------
Current Assets:
Cash $ 11,692
Receivables 894,630
Inventories 823,175
------------
Total current assets 1,729,497
Property and Equipment, Net 82,124
Other Assets 5,589
------------
$ 1,817,210
============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
----------------------------------------
Current Liabilities:
Amounts due to factor $ 718,521
Accounts payable and accrued expenses 688,031
Notes payable 219,562
Convertible notes payable 147,139
Current portion of long term debt 76,328
------------
Total current liabilities 1,849,581
Due to shareholders 530,065
Capital leases 13,060
------------
Total Liabilities 2,392,706
------------
Shareholders' deficiency:
Common Stock, no par value; 100,000,000 shares
authorized; 44,180,826 shares issued and outstanding 10,608,402
Accumulated deficit (11,183,898)
------------
Total shareholders' deficit (575,496)
------------
Total liabilities and shareholders' deficiency $ 1,817,210
============
</TABLE>
The accompanying Notes are an integral part of this statement.
1
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TELENETICS CORPORATION
a California corporation
Consolidated Statements of Income
(Unaudited)
___________
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended September 30, Ended September 30, Ended September 30, Ended September30,
1998 1997 1998 1997
------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C>
Net Revenue $ 1,119,403 $ 413,483 $ 2,030,097 $ 1,228,341
Cost of Goods Sold 533,232 233,408 939,034 693,210
----------- ----------- ----------- -----------
Gross Profit 586,171 180,075 1,091,063 535,131
----------- ----------- ----------- -----------
Operating Expenses:
Salaries and related costs 258,916 172,172 493,214 352,356
Rents 17,500 13,500 31,000 27,000
Shareholder costs 2,824 6,210 30,324 7,410
Selling, general and administrative 175,987 80,930 280,532 148,885
----------- ----------- ----------- -----------
Total Operating Expenses 455,227 272,812 835,070 535,651
----------- ----------- ----------- -----------
Operating Income (loss) 130,944 (92,737) 255,993 (520)
Benefit from Relief of Indebtedness -- (7,000) -- 15,100
Restructuring Costs -- (18,892) -- (26,455
Interest Expense (Net) (44,340) (15,446) (77,759) (32,394)
----------- ----------- ----------- -----------
Income (loss) Before Taxes 86,604 (134,075) 178,234 (44,269)
Provision for Taxes on Income at statutory rates -- -- 800 800
----------- ----------- ----------- -----------
Net Income (loss) $ 86,604 $ (134,075) $ 177,434 $ (45,069)
=========== =========== =========== ===========
Net Income per Common Share:
Basic $ 0.0020 $ (0.0039) $ 0.0042 $ (0.0013)
=========== =========== =========== ===========
Diluted $ 0.0019 $ (0.0036) $ 0.0038 $ (0.0012)
=========== =========== =========== ===========
Common Shares Used in Computing Net Income
Per Common Share:
Basic 44,047,493 34,225,826 42,564,159 34,225,826
=========== =========== =========== ===========
Diluted 46,680,826 37,225,826 46,680,826 37,225,826
=========== =========== =========== ===========
</TABLE>
The accompanying Notes are an integral part of this statement.
2
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TELENETICS CORPORATION
a California corporation
Consolidated Statements of Cash Flows
(Unaudited)
___________
<TABLE>
<CAPTION>
Six Months Six Months
Ended September 30, Ended September 30,
1998 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 177,434 $ (45,069)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 7,126 4,902
Benefits from debt relief - (15,100)
(Increase) decrease in operating assets:
Receivables (234,800) 100,210
Inventories (230,500) (59,500)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 168,257 (98,751)
Advances from factor, net 37,782 -
Customer deposits (4,891) 75,016
--------- ---------
Net cash provided by (used in) operating activities (79,592) (38,292)
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (41,238) (32,957)
--------- ---------
Net cash provided by (used in) investing activities (41,238) (32,957)
--------- ---------
Cash flows from financing activities:
Increase (Reduction) in long term debt (89,466) 24,212
Increase in notes payable 210,650 6,808
--------- ---------
Net cash provided by financing activities 121,184 31,020
--------- ---------
Net increase (decrease) in cash and equivalents 354 (40,229)
Cash and equivalents at beginning of period 11,338 18,599
--------- ---------
Cash and equivalents at end of period $ 11,692 $ (21,630)
========= =========
</TABLE>
The accompanying Notes are an integral part of this statement.
3
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TELENETICS CORPORATION
a California corporation
Notes to Consolidated Financial Statements
Note 1. Basis of Presentation
---------------------
The consolidated financial statements included herein have been prepared by
Telenetics Corporation (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not misleading when
read in conjunction with the Company's consolidated financial statements for the
year ended March 31, 1998. The financial information presented reflects all
adjustments, consisting only of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods presented. The results of operations for the six months ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the full year ended March 31, 1999.
Note 2. Income Per Common Share
-----------------------
Basic earnings per share are computed by dividing earnings available to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflect per share amounts that
would have resulted if dilutive potential common stock had been converted to
common stock.
4
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
in this Quarterly Report on Form 10-QSB. Except for the historical information
contained herein, the following discussion contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Quarterly Report on Form 10-QSB should be read as being
applicable to all related forward-looking statements wherever they appear
herein. See "Forward Looking Statements; Cautionary Statement." The Company's
actual results may differ materially from the results discussed in the forward-
looking statements.
Overview
The Company is in the business of designing and manufacturing high quality,
industrial grade modems, fiber optic drivers and radio modems within the
industrial automation industry. The Company is also active in the design and
manufacture of customized modem products for manufacturers of utility meters,
remote terminal units, electric relays, flow measurement devices, traffic
controllers and for companies within the oil and gas industry. In addition to
the Company's primary focus on the industrial automation market, the Company
plans to expand into several other markets that have similar requirements for
the type of specialized modems the Company designs, such as transportation,
lottery and gaming, vending machine automation, security, point of sales and
automated teller machines, telemedicine and military applications.
The Company's results of operations have been and may continue to be subject
to significant fluctuations. The results for a particular period may vary due to
a number of factors, many of which are beyond the Company's control, including
the timing and nature of revenues from product sales that are recognized during
any particular quarter, the impact of price competition upon the Company's
average selling prices, the availability and pricing of components for the
Company's products, market acceptance of new product introductions by the
Company and its competitors, the timing of expenditures in anticipation of
future sales, product returns, the financial health of the Company's customers,
the overall state of the modem and data communications industry and economic
conditions generally. In addition, the volume and timing of orders received
during a quarter are difficult to forecast. The Company expects that its
quarterly operating results will continue to fluctuate in the future as a result
of these and other factors.
The Company continually seeks to improve its product designs and manufacturing
and assembly approach in order to reduce its costs. The Company pursues a
strategy of outsourcing rather than internally developing its modem chipsets,
which are application-specific integrated circuits that form the technology base
for its modems. By outsourcing the chipset technology, the Company is able to
concentrate its research and development capabilities on modem system design,
leverage the extensive research and development capabilities of its chipset
suppliers, and reduce its development time and associated costs and risks. This
approach enables the Company to quickly develop new and innovative products
while maintaining a relatively low level of research and development efforts and
expenses. The Company also outsources aspects of its manufacturing to contract
assemblers as a means of reducing its fixed labor costs and capital expenditures
and providing the Company with greater flexibility in its capacity planning.
Results of Operations
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The following discussion and analysis addresses the results of the Company's
operations for the three months ended September 30, 1998, as compared to the
Company's results of operations for the three months ended September 30, 1997.
Revenues. Net revenues for the three months ended September 30, 1998 were
$1,119,403 as compared to $413,483 for the three months ended September 30,
1997, an increase of $705,920 or approximately 171%. This increase in revenues
was primarily a result of the Company's increased volumes of sales, primarily
due to purchases by Duquesne Light Company ("Duquesne"), GE/Harris, and Bailey
Network Systems.
Cost of Goods Sold. Cost of goods sold increased by $299,824, or approximately
128%, to $533,232 during the three months ended September 30, 1998 from $233,408
during the three months ended September 30, 1997. The increase in cost of goods
sold resulted from a significant increase in volume of sales and corresponding
increase in purchases of components from vendors, partially offset by an
increased efficiency in procurement and manufacturing processes and the
Company's ability to obtain greater discounts from its major vendors.
Operating expenses. Salaries and related costs increased by $86,744, or
approximately 50%, to $258,916 during the three months ended September 30, 1998
from $172,172 during the three months ended September 30, 1997. The increase in
salaries and related costs resulted from the hiring of additional engineering,
manufacturing and quality control and customer support personnel during the
three months ended September 30, 1998.
Shareholder costs, consisting primarily of payments to professionals,
decreased by $3,386 to $2,824 for the three months ended September 30, 1998 from
$6,210 for the three months ended September 30, 1997. However, the Company
generally anticipates shareholder costs to increase in future periods due to
increased payments to professionals primarily as a result of the recent
resumption by the Company of its obligation to file reports and statements with
the Securities and Exchange Commission and an increase in contractual
relationships entered into with vendors and customers.
Selling, general and administrative expenses increased by $95,057, or
approximately 117%, to $175,987 during the three months ended September 30, 1998
from $80,930 during the three months ended September 30, 1997. The increase in
selling, general and administrative expenses resulted primarily from an increase
in sales and marketing expenses.
Interest expense (net). Interest expense during the three months ended
September 30, 1998 increased by $28,894, or approximately 187%, to $44,340 from
$15,446 during the three months ended September 30, 1997, but remained unchanged
as a percentage of net revenue at approximately 4%. The increase in dollar terms
of interest expense is a result of higher levels of borrowing during the three
months ended September 30, 1998 attributable to borrowings under the Company's
factoring agreement. While the Company intends to repay some or all of the
amounts of such indebtedness out of future cash flow from operations,
management's internal cash projections estimate that such borrowings may remain
outstanding for the foreseeable future.
Income Taxes. The Company did not incur any provision for income taxes for
the three months ended September 30, 1998 or the three months ended September
30, 1997. However, management of the Company anticipates that the provision for
income taxes will increase significantly in the future as net revenue increases
and the Company's net operating loss carry forward is fully utilized.
Net income. Net income during the three months ended September 30, 1998 was
$86,604 as compared to a net loss during the three months ended September 30,
1997 of $134,075.
COMPARISON OF SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The following discussion and analysis addresses the results of the Company's
operations for the six months ended September 30, 1998, as compared to the
Company's results of operations for the six months ended September 30, 1997.
Revenues. Net revenues for the six months ended September 30, 1998 were
$2,030,097 as compared to $1,228,341 for the six months ended September 30,
1997, an increase of $801,756 or approximately 65%. This increase in revenues
was primarily a result of the Company's increased volumes of sales, primarily
due to purchases by Duquesne, GE/Harris and Bailey Network Systems.
Cost of Goods Sold. Cost of goods sold increased by $245,824, or approximately
35%, to $939,034 during the six months ended September 30, 1998 from $693,210
during the six months ended September 30, 1997. The increase in cost of goods
sold resulted from a significant increase in volume of sales and corresponding
increase in purchases of components from vendors, partially offset by an
increased efficiency in procurement and manufacturing processes and the
Company's ability to obtain greater discounts from its major vendors.
5
<PAGE>
Operating expenses. Salaries and related costs increased by $140,858 or
approximately 40%, to $493,214 during the six months ended September 30, 1998
from $352,356 during the six months ended September 30, 1997. The increase in
salaries and related costs resulted from the hiring of additional engineering,
manufacturing, quality control and customer support personnel during the six
months ended September 30, 1998.
Shareholder costs, consisting primarily of payments to professionals increased
by $22,914 to $30,324 for the six months ended September 30, 1998 from $7,410
for the six months ended September 30, 1997.
Selling, general and administrative expenses increased by $131,647, or
approximately 88%, to $280,532 during the six months ended September 30, 1998
from $148,885 during the six months ended September 30, 1997. The increase in
selling, general and administrative expenses resulted primarily from an increase
in sales and marketing expenses.
Interest expense (net). Interest expense during the six months ended September
30, 1998 increased by $45,365 or approximately 140%, to $77,759, or
approximately 4% of net revenue, from $32,394, or approximately 3% of net
revenue, during the six months ended September 30, 1997. The increase is a
result of higher levels of borrowing during the six months ended September 30,
1998 attributable to borrowings under the Company's factoring arrangement. While
the Company intends to repay some or all of the amounts of such indebtedness out
of future cash flow from operations, management's internal cash projections
estimate that such borrowings may remain outstanding for the foreseeable future.
Income Taxes. The Company incurred a provision for income taxes in the amount
of $800 for each of the six-month periods ended September 30, 1998 and 1997,
which amount reflects the payment of the minimum tax of $800 imposed by the
California Franchise Tax Board on domestic corporations and no federal income
tax payment. Management of the Company anticipates that the provision for income
taxes will increase significantly in the future as net revenue increases and the
Company's net operating loss carry forward is fully utilized.
Net income. Net income during the six months ended September 30, 1998 was
$177,434 as compared to a net loss during the six months ended September 30,
1997 of $45,069.
Liquidity and Capital Resources
As of September 30, 1998, the Company had a negative working capital of
$120,084 and an accumulated deficit of $11,183,898. As of that date, the
Company's principal sources of liquidity consisted of $11,692 in cash and
$864,630 in receivables. As of September 30, 1998, the Company had approximately
$7.1 million in backlog orders for its products.
The Company believes that current and future available capital resources, cash
flow from operations, and other existing sources of liquidity will be adequate
to fund its operations for the remainder of the current fiscal year. However,
there can be no assurance that sufficient funds will be available or that future
events will not cause the Company to seek additional capital sooner, including,
but not limited to, the failure by the Company to timely collect outstanding
accounts receivable. To the extent the Company is in need of any additional
financing, there can be no assurance that any additional financing will be
available to the Company on acceptable terms, or at all. The inability to obtain
such financing could have a material adverse effect on the Company's business,
financial condition and results of operation. If additional funds are raised by
issuing equity or convertible debt securities, options or warrants, further
dilution to the existing shareholders of the Company may result.
If adequate funds are not available, the Company may also be required to
delay, scale back or eliminate its product development efforts or to obtain
funds through arrangements with strategic partners or others that may require
the Company to relinquish rights to certain of its technologies or potential
products or other assets. Accordingly, the inability to obtain such financing
could result in a significant loss of ownership and/or control of its
proprietary technology and other important Company assets and could also
adversely affect the Company's ability to continue its product development
efforts, which the Company believes contributes significantly to its competitive
advantage. If any of such circumstances were to arise, the Company's business,
financial condition and results of operations could be materially and adversely
affected.
6
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Year 2000 Compliance
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information systems to accurately process
information that may be date-sensitive. Any of the Company's programs that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. The Company utilizes a number of computer
programs across its entire operation. The Company has not completed its
assessment, but currently believes that costs of addressing this issue will not
have a material adverse impact on the Company's financial position. However, if
the Company and third parties upon which it relies are unable to address this
issue in a timely manner, it could result in a material financial risk to the
Company. In order to assure that this does not occur, the Company plans to
devote all resources required to resolve any significant year 2000 issues in a
timely manner.
Looking Ahead
Set forth below are major highlights of the Company's business plan for fiscal
1999. Management believes that the significant upward trend in increased sales
and bookings as well as cost reductions that began in the last quarter of fiscal
1998 will continue through fiscal 1999.
During fiscal 1999 a significant portion of revenues will be realized from
those opportunities that were uncovered and developed during fiscal 1998. Some
of these developments are as follows:
. Strategic Relationship with Duquesne. The Company anticipates receiving
orders in the approximate value of $8 million from Duquesne during fiscal
1999. The Company expects that a significant portion of these units under
this purchase order are to be shipped before December 31, 1998. The Company
received the first portion of this order for approximately $1 million in
June 1998 and has commenced shipment of products. By September 30, 1998,
this initial $1 million order was increased to $5.3 million.
. Increase in Automated Meter Reading Market. The Company anticipates that a
significant portion of its business in fiscal 1999 will be derived from an
international trend in increased meter reading automation. By pursuing
major utilities with similar requirements as Duquesne, and promotion of
system solutions such as the Company's Omega(TM) AMR Communication
Interface Cabinets, the Company anticipates a significant increase in
revenues from this market.
. China Light & Power Agreement in Principal. The Company anticipates
shipping during fiscal 1999 approximately $1 million in specially designed
products to China Light & Power ("CLP"). The Company commenced shipments in
March 1998, based upon an agreement in principal reached between the
Company and CLP. As of October 31, 1998 the Company had received
approximately $625,000 in purchase orders from GE/Harris.
. Existing Major Customers. The Company anticipates that its general business
with its major customers will continue to grow in fiscal 1999. During the
six months ended September 30, 1998, the Company's top ten customers were
responsible for approximately $1.82 million of total net revenues, or
approximately 90% of total net revenues. The Company anticipates this trend
will continue in the future.
. Transportation Industry. The Company anticipates that its significant
activities within the transportation industry and close work with several
departments of transportation such as CALTRANS, Wyoming Department of
Transportation, Pennsylvania Department of Transportation and several other
departments of transportation that are currently customers of the Company,
will result in a significant increase in the Company's business during
fiscal 1999.
. Distribution. The Company believes that its aggressive plan in identifying
and hiring distributors, value added resellers and system integrators in
fiscal 1998 will result in additional revenues in this sector in fiscal
1999 and beyond.
7
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. International Business. The Company anticipates a significant increase in
international business. Current opportunities in China, Mexico, India,
Spain and several other countries that the Company has been involved with
may result in approximately $1 million of additional revenues during the
next 18 months. For example, in August 1998 the Company was selected by
Bailey Network Management as the exclusive supplier of industrial modem
racks for a major utility automation project for Mexico's electric utility,
Comision Federal de Electricidad.
Forward-Looking Statements; Cautionary Statement
Certain of the statements contained in this report, including those under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and especially those contained under "Liquidity and Capital
Resources" and "Looking Ahead," are "forward-looking statements" that involve
risks and uncertainties. The actual future results of the Company could differ
materially from those statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this Quarterly
Report on Form 10-QSB, risks associated with managing the Company's growth, as
well as those factors discussed in "Risk Factors" described in Item 6 of the
Company's Form 10-KSB for the year ended March 31, 1998. While the Company
believes that these statements are accurate, the Company's business is dependent
upon general economic conditions and various conditions specific to the modem
and data communications industry, and future trends and results cannot be
predicted with certainty. In particular:
. Although the Company has received a $5.3 million purchase order from
Duquesne (through its subcontractor, Sargent Electric Company) and
anticipates additional purchase orders in the aggregate amount of
approximately $1,700,000, there can be no assurance that such anticipated
additional purchase orders will be placed as expected. Furthermore, the
Company's Omega(TM) AMR Communication Interface Cabinets which are the
subject of this purchase order, are new products of the Company.
Accordingly, there can be no assurance that the Company will not incur
significant technical problems or application issues that may delay the
shipments.
. The Company has no prior experience in shipping large quantities of its
Omega(TM) AMR Communication Interface Cabinets. The Duquesne business is
anticipated to exceed 10,000 units for fiscal 1999. There can be no
assurance that there will be no delays in procuring, manufacturing, testing
and shipping such a large volume of products.
. The Company continues to experience problems associated with under-
capitalization. This may adversely affect the ability of the Company to
ship its products in a timely manner, causing customers such as Duquesne
and others to cancel a portion or all of their orders.
. Although the Company has received and shipped the first portion of products
for CLP pursuant to the terms of an agreement in principal, new unforeseen
technical and application field problems may adversely affect future
shipments. Further, there can be no assurance that the Company will
successfully negotiate a definitive agreement on terms favorable to the
Company.
. As of November 1998, there are no national standards approved for data
communication and data acquisition within the transportation industry.
Although the Company believes that its products will adapt to any new
standards, lack of such procedures may delay orders or adversely affect
shipments.
. The Company has limited experience in marketing and selling its products in
international markets. International customs, standards, approvals and
political and economical uncertainties may adversely affect the Company's
ability to ship its products internationally in a timely and profitable
manner.
The Company has not experienced a material adverse impact of such risks and
uncertainties and does not anticipate such an impact. However, no assurance can
be given that such risks and uncertainties will not affect the Company's future
results of operations or its financial position.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule.*
(b) Reports on Form 8-K.
None.
_________
* To be filed by amendment.
9
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TELENETICS CORPORATION
Dated: November 16, 1998 By: /S/ MICHAEL A. ARMANI
--------------------------------------------
Michael A. Armani
Chairman of the Board, President, Chief
Executive Officer and Chief Financial
Officer (principal financial and
accounting officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- - ----------- -----------
27.1 Financial Data Schedule*
____________
*To be filed by amendment.
